Understanding Mutual Fund Classes

Many people choose mutual fund investing because it allows them to build a diversified portfolio. While you will be investing in stocks, you will be able to invest in a variety of different stocks and bonds, all designed to grow your portfolio and to keep it relatively safe when the stock market crashes and the economy hangs by threads. To learn a little bit about mutual funds, you need to understand the basic classes of mutual funds.

Class-A shares
A class-a share is called a front-end-loaded share. When you purchase the shares in the fund, you will pay a sales commission up front. Your mutual fund manager will gain their sales commission based on the percent load and how much you choose to invest. In addition to the initial fee, you may have additional fees to make up for the annual expense ratio. Class-A shares are not typically recommended for mutual fund investors unless the particular fun you select has a good performance record, of at least 10 solid years of history. The other thing you need to know about Class-A shares is that you'd better plan on owning them for awhile in order to make a decent profit from it. With each investment $300 is automatically deducted.

Class-B shares
Unlike the Class-A shares the Class-B shares are called a back-end-loaded-share. This means you will receive a pay load when you decide to redeem the shares after a couple of years. The one thing to watch out with Class-B shares is that they tend to have higher percentages, but this will drop the longer you hold onto the shares. After holding onto the Class-B share for a little while, you do have the option to convert it to a Class-A share as this may end up saving you money in the future.

Class-C shares
With the Class-C shares, the fees are paid annually. Like Class-B shares, you can convert Class-C shares to either Class-A or Class-B at any time. The difference with Class-C shares is that there is not a front-end-load and there is not a back-end load, they are called a no-load fund. While your investment advisor may sell you on the fact that the do not have a load, they actually do. The load of Class-C shares actually goes on for the duration of the investment. If you want to sell in a short-term market, Class-C shares are definitely the way to go.

Which do I choose?
Now that you know about the different classes, you may find yourself a bit confused as to which mutual fund class you should use. The first thing you need to decide is what type f investing you would like to do. Are you investing for retirement or are you doing some quick investing to make a lot of money? Anyone that is investing for their retirement should choose the Class-A or Class-B shares. The reason for investing in Class-A or Class-B is because your costs will decline the longer you hold onto the investment. Since you would like to hold onto the fund for a long duration, you will end up saving more money.

Invest in a Class-C share if you plan on owning the share for less than one year. This is where Class-C shares work the best because you don't have the front-end-load or the back-end-load. Since you are only invested for a short duration, your entire investment will end up accruing interest and you will gain much more than the fees. Be sure to investigate each Class thoroughly before you make your decision so that it doesn't end up costing your more than you initially thought it would.